Banks' profitability at inflexion point, to moderate in FY26: India Ratings

Indian banks' profitability is at an inflexion point and is likely to moderate in 2025-26, hurt by higher delinquencies in unsecured loans and increased credit costs, India Ratings said on Tuesday.

The rating agency said in a release that banks' rapid improvement in financial metrics seen over financial years 2021 to 2024 is likely to have peaked and will see an "inflexion point" in 2024-25. 

India Ratings has observed an increase in delinquencies in specific segments, such as personal loans, credit cards, and microfinance, that will weigh on banks' profits, it said.

 

"This rise in delinquencies appears to be driven by a combination of self-employed individuals, those with informal or semi-formal income sources, and younger populations," it added.

Indian banks had witnessed a sharp surge in growth of personal loans and credit card outstanding after the Covid-19 pandemic and related lockdowns, which had eroded borrowers' incomes.

Concerned about the risk of bad loans, the Reserve Bank of India in late 2023, imposed higher capital requirements for banks on personal loans and credit cards, which is now translating into slower growth in these segments.

Banks' credit growth has lost some steam, largely due to the base effect and the regulatory changes, India Ratings said, cutting its credit growth forecast for 2024-25 to around 13.5 per cent from 15 per cent earlier.

It expects banks' loan growth to be in the range of 13-13.5 per cent and deposit growth at 12-13 per cent in 2025-26, amid high competition among lenders for garnering low-cost current account savings and account deposits.

Non-banking finance companies (NBFC) are also likely to see a slowdown in loan growth, and credit costs and margin pressure in 2025-26, India Ratings said.

"Profitability pressure (on NBFCs) could intensify due to the ongoing rise in the credit cost for the sector because of borrower over-leveraging and slowdown in credit growth," it added.